While southern European economies are showing signs of timid growth, according to data from the Organisation for Economic Co-operation and Development, unemployment rates are still high in Spain, Portugal, Italy and Greece, leading analysts to doubt the pace of recovery in these economies.

Uncertainty and political instability have been prevalent in these countries since 2010, when the sovereign debt crisis hit the eurozone, making them less attractive for investment. Yet the quantitative easing programme announced by European Central Bank president Mario Draghi in January and the €315bn investment plan unveiled by European Commission president Jean-Claude Juncker in November 2014 could improve the investment environment, boost FDI and put the southern European economies back on track.

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“Reforms should play a key role when it comes to attracting FDI,” says Dimitrios Katsikas of the Crisis Observatory at the Hellenic Foundation for European and Foreign Policy. “Northern Europe seems to attract more FDI inflows in comparison with the south. If Mediterranean countries move towards necessary reforms, especially in institutional terms, then they could compete with northern Europe, attract more investments and finally help Europe to grow. This could work as a restart for Europe and its economy.”

Mediterranean advantage

Mediterranean countries have many similar competitive advantages. They are developed countries with a well-qualified workforce but low labour costs as a result of the crisis, and they can attract investment in sectors such as agriculture, fishing, tourism and renewable energy. But despite their similarities, they present varying levels of success in attracting FDI.

“It is a mistake to look at southern Europe as a homogeneous group, because it is not,” says Lena Tsipouri, associate professor of economic science at the University of Athens. She says southern European countries differ in aspects such as market size, reaction to reforms and institutional set up, among others.

Investment into these destinations peaked in 2009, when a total of 492 projects were tracked. Since then, the number of projects has been decreasing, with the exception of 2012 when 476 projects were recorded. As of November 2014, 265 projects were recorded in the year, according to data from greenfield investment monitor fDi Markets. Projects have not been distributed evenly across these countries, however, and Spain has attracted the majority.

“Investors see Spain as a country willing to engage in very difficult choices and take on the public European opposition in order to restructure its economy and make the labour force more flexible, so FDI is coming in, not only [because of] what is being done, but in anticipation that Spain will continue in that direction,” says Tom Elliott, an international investment strategist at deVere Group. This is not happening at the same level in Italy, says Mr Elliott, due in no small part to uncertainty over whether the country’s political establishment is able to make the country's labour market more flexible.

Ms Tsipouri says investors are interested in financial and short-term investments, while larger long-term investments are probably on hold, especially in Greece and Portugal, as growth in these countries is not yet stable.

Spain’s dominance

Spain received the most FDI among southern European countries in 2013, according to the World Investment Report 2014 published by the UN Conference on Trade and Development. The country attracted $39.2bn, while Italy brought in $16.5bn, Portugal $3.11bn and Greece $2.57bn.

“When it comes to Spain, there is a growing interest from German and Dutch investors, especially in commercial real estate, logistics, distribution and building supplies,” says David Scrimgeour, owner of Munich-based DS Consulting. He adds that investors are interested in Spain as they see an opportunity to build and double assets cheaply, as well as employ people at low cost while domestic demand and the economy are growing.

José María Blasco Ruiz, a project management director at ICEX Spain Trade and Investment, agrees that lower labour costs and higher productivity are attracting multinational manufacturing companies. He says there is a change in investor perceptions regarding Spain’s economy, and that the country is undertaking an ambitious programme of structural reforms that will impact internal and external competitiveness.

Meanwhile, following this more optimistic theme, Mr Katsikas at the Hellenic Foundation says: “There is a decline in uncertainty for the Portuguese and Italian economies regarding their post-crisis period, as both countries can now borrow money with low interest via bonds, despite the issues that they still face.” 

Miguel Frasquilho, president of Portugal’s business development agency AICEP, says: “The main disadvantages that have been pointed out by foreign investors have to do with understanding the Portuguese legal system, the burden of the tax structure on companies and the public expenditure. The government is aware of these issues and some reforms are being put in place to address these problems.

“Exports are expected to maintain strong growth, supported by the recovery of external demand, although with lower growth rates than in the period before the financial crisis. Almost in all different economic sectors, exports have grown in 2013. Tourism leads this growth, surpassing €9.2bn in volume.” 

Differing paths

Andrea Napoletano, director of the Italian Trade Agency’s FDI unit, says Italy suffers from differing development paths between the country’s north and south, particularly in terms of infrastructure, which has a large influence on investment decisions. He emphasises that by implementing its reform programme, Italy should be able to attract more FDI, improve the competitiveness of Italian firms and assist foreign investors throughout the life of their investment cycle.

In Italy, FDI inward flows increased by 9% in 2013 after a decline of 22% the previous year, according to the World Investment Report 2014. “Although the volume of FDI [in Italy] is still below the level reached before the crisis, the positive influence of this growth has created a positive feeling of confidence among investors,” says Mr Napoletano.

Italy’s attractiveness depends on how the country is going to cope with labour reform, according to Mr Katsikas, who adds that Italy and Greece face similar issues related to the public sector, bureaucracy and corruption.

On this topic, Stephanos Issaias, CEO of investment promotion agency Enterprise Greece, says: “In 2013, Greece achieved a current account surplus for the first time since 1948 of 0.7% and a primary surplus of 0.8% of GDP. [These were achieved] a year earlier than the projections of the economic adjustment programme, turning the twin deficits into twin surpluses.” 

Panos Paleologos, founder of HotelBrain, an independent company specialising in hotel development, notes that FDI interest in the tourism sector in Greece comes not only from foreign investors but also from Greek nationals who lived abroad and now want to invest their money back home. He adds that his company has been discussing developments in 10 greenfield projects. Greece’s recent elections, however, have led to uncertainty as investors wait and see the new government’s approach to FDI.

Plugging the gaps

“FDI is, in most cases, a long-term commitment of a company towards a country. For this long-term commitment to be successful for both companies and host countries, there is a great need for transparency, stability and predictability in policy-making,” says Douglas van den Berghe, CEO of Investment Consulting Associates.

He adds that the new Greek government's renegotiating of its debt arrangement with the EU may signal a lack of confidence and predictability towards existing and potential foreign investors, as it implies that when a company does business with a government, or when it signs contracts with that government, it cannot rely on these contracts being valid again when elections take place. This can have a negative impact on FDI beyond mere reputational damage.

Only time will tell whether the upcoming elections in Italy, Spain and Portugal will serve as a crash test – not only for Europe, but for FDI in general.